Defer to Congress on “first sale,” COAC tells Customs
Defer to Congress on “first sale,” COAC tells Customs
Trade seeks repeal of “first sale” proposal
U.S. Customs and Border Protection's surprise notice to change a longstanding valuation method for imports circumvented established lines of communication with the trade community and overstepped the agency’s authority, the Commercial Operations Advisory Committee told the agency last week.
At it’s quarterly meeting held in Tucson, Ariz., the 20-member industry advisory panel asked the agency to withdraw its proposed reinterpretation of the “first sale” rule because it is a significant change in Customs business that needs to be addressed through legislation rather than the administrative rules process.
In January, CBP published a notice seeking to reverse the way import calculations are made to determine duties. Under the first sale doctrine, importers can pay duty on the price at which a supplier purchased the goods from the overseas factory rather than on the last sale to the importer, as long as documentation can prove the transaction is done at arms length and the goods were intended for export to the United States from the outset. The last sale raises the value of goods for duty purposes because it includes the middleman’s profit.
The law firm of Sandler, Travis & Rosenberg has said the change could cause tariffs to rise 8 percent to 15 percent and cost companies millions of dollars. Trade professionals predict importers will have to reevaluate their cost structures for sourcing products from foreign countries. The repeal of the first-sale method would also impact non-resident importers who sell to U.S. buyers and multinationals that engage in transfer pricing among their global subsidiaries to reduce their tax burden.
The proposal attempts to overturn 20 years of appellate court decisions and customs practice that affirms the “first sale” rule. As recently as Jan. 3 of this year, CBP conceded a case in the Court of International Trade involving the use of first sale for export by Target Stores on shoes purchased via a middleman, according to a bulletin from Serko Simon Gluck and Kane LLP.
COAC said CBP cannot change the valuation statute, which directs cargo appraisal be done at the lower alternative value, through a simple rule interpretation.
“Any change in the interpretation of the statute must be introduced by legislation amending the statute, 19 USC 1401a and not through an ineffective pronouncement that suddenly CBP is adopting a different interpretation,” the COAC resolution said.
“CBP frequently advises the trade that if they don’t like the rules, to go get legislation. So we would hope that they would take their own advice,” said Tom Travis, a partner at Miami-based Sandler, Travis and Rosenberg in a phone interview. The Canadian government faced a similar choice several years ago and went through the legislative process to change the first sale rule in that country, he noted.
But Daniel Baldwin, assistant commissioner for international trade, responded during the meeting that the law is not clear-cut on whether first sale requires a statutory change. He encouraged interested parties to file comments to the docket and insisted no final decision has been made.
CBP has been interested for years in repealing the first sale valuation method for reasons of administrative efficiency. It took advantage of an opening provided by the World Customs Organization’s Technical Committee on Customs Valuation, which recently issued a non-binding opinion that the last sale’s price should be relied on for customs valuation purposes. CBP says it is difficult to verify whether transactions utilizing the first-sale method are between unrelated parties and clearly destined at the time for export to the United States. The complexity of the process also raises concerns about whether importers are using reasonable care to meet their obligations, such as adding royalties and other factors that increase value beyond the factory, the agency said in the notice.
But some question the timing and workload rationale of CBP’s decision. “Why is it more difficult to administer than other preference programs such as GSP that involve foreign documents? Is it a question of staffing?” said Rob Pisani, a partner in Pisani & Roll.
Companies involved international trade have quickly mobilized since Jan. 24 to stop CBP from implementing the rule change on its own.
“I’ve not seen the import community so united and concerned about a proposed change on a trade issue in a long time,” Travis said.
His firm is organizing the efforts of individual companies to press Congress and the administration to revoke the “first sale” proposal and coordinating with the American Apparel & Footwear Association, which is leading the campaign on behalf of trade associations. Last week, trade representatives lobbied on Capitol Hill to educate lawmakers about the potential impact of the rule and what they feel is a flawed process, and a broad coalition of 97 companies and trade associations asked the Department of Homeland Security to withdraw the proposal.
“At a time when intense concern over the economy is generating pressure on all levels, from manufacturing to the consumer, I am hard-pressed to understand why the government would impose a tax where one didn’t already exist,” said Peter Gabbe, chief operating officer at Carole Hochman Design Group and chairman of the American Apparel & Footwear Association, in a Feb. 7 statement.
Trade experts and government officials acknowledge that it is difficult to quantify how much money is at stake because nobody really knows the extent to which the first sale value is used for the entered value. CBP rarely knows which method a company uses for valuation unless it pulls the invoices or there is a legal case in which a company must defend its method for meeting its customs duty obligation. A company that is audited must produce documents that reflect the sale and resale of the goods through multitiered transactions, along with the transportation of the shipment from the point of first sale to prove that the pricing is similar to that paid to an unrelated seller and that the sale is properly structured as a factory sale export to the United States.
“A lot of big importers use first sale, but they may be reluctant to advise the agency about how much they are saving,” trade attorney Pisani said.
Many companies don’t apply the rule because they can’t gain the cooperation of the middleman, don’t have the necessary information, or otherwise are uninterested, according to Travis.
Some importers will figure out how to mitigate the impact of a rule change by restructuring their transactions so that buyers act more as agents facilitating a low price direct sale, said Timothy Skud, deputy assistant secretary for tax, trade and tariff policy at the Treasury Department, in Tucson.
He asked importers to provide any information they have that helps quantify the effective duty rate from applying the first sale rule.
Applying lower duty rates through the first sale method is a completely lawful business practice, not a way to evade duties, Travis stressed.
“This is no more than tax planning. It’s an appropriate way to plan your imports with knowledge of what the law requires. This is the application of well-settled law to an import transaction which has been recognized by the courts and the Customs Service for almost 20 years,” he said.
The United States and the European Union are among a handful of jurisdictions that still permit the transaction value in multitier transactions be based on the first sale value.
The resolution also said CBP should have consulted with COAC as a good partnership practice and because the 2006 SAFE Port Act requires advance notice to the group of any policies and actions that have a significant impact on international trade and customs revenue functions.
“I don’t think it was a technical foul to announce the change publicly,” Skud said. CBP’s obligation to consult with COAC “doesn’t mean it can’t consult with the full trade community concurrently” through a Federal Register notice. The collaborative process has to take place before the rule goes into effect, not before it’s published, he argued.
Customs has extended the comment period an additional 30 days to April 23. COAC asked that the public be given an extra 15 days to file comments if the rule is not withdrawn, and other groups are seeking a 180-day extension. ' Eric Kulisch